The debate over a Greek default has put the spotlight on the European Central Bank and specifically on the way the ECB has violated rules to become an enormous “bad bank” with hundreds of billions of bad loans on its books – loans which tax payers will be obligated to pay for in addition to the sums arising from the staggering EU bailouts.And it is the ECB’s systematic violation of rules on collateral and bail outs that could well be the final nail in the coffin and Götterdämmerung of the Frankfurt-based central bank as Greece lurches ever closer to default and the eurozone approaches financial meltdown.
But what rules exactly has the ECB violated?
Germany’s Der Spiegel revealed this week that the ECB violated one set of rules by giving banks in Greece, Ireland and Portugal as well as Spain a stupendous 480 billion euros against collateral of little or no quality.
To have some idea of what this means in the language of ordinary people, take, for example, a situation where someone like myself goes to a national central bank or the ECB with a scrap of paper saying I have 1 billion euros worth of “Guiness Emerald Jewels from County Maquire in Greece” and. on this basis and without checks, gets a 1 billion euro loan at 0% interest?
Can I do this? Can you? Emphatically no.
Can I then — when the time comes for me to repay the billion euro “loan” — hand in another note to the ECB saying, oh, so sorry, the market in “Guinesse Emerald Jewels” collapsed, and I now have…errr…. only 1 million euros worth of them. And give my apologies to the tax payer about the missing 999 million euro.
Oh, and by the way, thanks so much, boys, for the 100 million or so I pocketed from my investment in Greek and Irish bonds at that nice interest payments of 6% you kindly arranged for me with that EU/IMF loan thing.
Don’t think I would get away with this scam. But if you are bank, it seems, you can, because the ECB has been violating strict rules on the quality of collateral as well as the no bailout principle.
Breaching the rules, a bank can hand in a scrap of paper as collateral, and the ECB will accept it at face value and not bother checking whether there are substantial assets behind it, Der Spiegel has revealed. The ECB will hand out billions and billions of euros, in fact 480 billion euros in liquidity, without adequate collateral, knowing the tax payers will have to stump up, in what is in effect an act of looting on a gigantic scale.
Der Spiegel reports that at the core of this collaterial fraud bing run by the ECB are the very same subprime property loans that are at the core of the bank crisis, in the first place, and the subject of criminal probes in the USA.
As Vienna Economics Professor Franz Hörmann pointed out, fair value accounting rules can allow banks to assign virtually any value to, say, a house or some other property, and so give the appearance collateral.
For example, an Irish property developer might borrow money from a bank and invest 10,000 euros of actual money in building a house. The bank, however, might book the house as an asset of 1 million in a property boom. When the boom collapses, and the shell of a house stands around unsold, the bank can then go to a complicit government, which has guaranteed all bank “losses”, and ask for the difference of 990,000 euros between the actual cost of the house and the value of the house on its books because this is its loss on paper.
This fair value accounting fraud is the basis of the truly stupendous property losses of Depfa Bank and other banks in the property market that tax payers are now expected to make good.
Complicit governments, specifically the Irish government, have saddled tax payers with these gigantic, accounting losses from banks usch as Depfa when the banks themselves have lost little or no actual capital. Under the pretext of having to pay interest on these fractional reserve, paper debts, taxpayers in countries like Ireland and Greece are being looted of money and assets by their own governments and the EU and IMF, which has forced countries to take on a penal loan to make these interest payments to banks.
Der Spiegel reports that central banks – and so ultimately the ECB – did not bother to check on the value of the ABS collateral that Depfa, for example, was handing in to get cash that taxpayers will have to stump up for when the collateral turns out to have fallen dramatically in value from the false and artificial value on the ECB’s accounting books.
“The ECB accepted so-called asset-backed securities (ABS) as collateral. At the beginning of the year, these securities amounted to €480 billion. It was precisely such asset-backed securities that once triggered the real estate crisis in the United States. Now they are weighing on the mood and the balance sheet at the ECB,“ writes Der Spiegel.
„For example, Depfa Bank, the Irish subsidiary of the scandal-ridden German bank HRE, had 78 securities placed on the ECB’s list of investment-grade securities in February. According to documents SPIEGEL has obtained, 25 of those securities appear not to have been sufficiently discounted.
An inquiry about these incorrectly valued securities elicited the following nonchalant response from the Central Bank of Ireland: “Thank you for the information. The discount for XS0226100310 should be 46 percent. We will apply this discount in the next few days.” This meant that the owners of the security could borrow about 20 percent less money from the ECB.“http://www.spiegel.de/international/business/0,1518,764299,00.html
ECB violated all the rules not just in accepting the worthless asset based securities – the focus of the subprime probes.
Andrew Lilico pointed out in The Telegraph yesterday (“Whom should I sue?) that the EU Lisbon Treaty rule book explicity says that countries at risk of economic collapse should not be propped up by other countries. And yet that is what the ECB has been doing at a cost of 100s of billions of more to the tax payers.
“Everyone knows that this Treaty article was violated by the Greek, Irish and Portuguese bailouts. Indeed, senior French politicians have not been shy of spelling matters out. For example, in May last year, French Europe Minister Pierre Lallouche cheerfully declared: “De facto, we have changed the treaty”. Again, Christine Lagarde – now favourite for the IMF job – stated last December: “We violated all the rules because we wanted to close ranks and really rescue the euro zone…The Treaty of Lisbon was very straight-forward. No bailout.”
Now if, say, Greece and Ireland default, then bureaucrats and politicians will have lost lots of my money doing something forbidden by ratified international treaty. Can I sue them, to get some of it back?“ he asks.
Ralph Atkins explains in the FT how the ECB tore up the rule book to prop up collapsed economies.
“The ECB helped persuade eurozone political leaders to assemble a €750bn rescue plan with the International Monetary Fund. It also took action itself. For Greece, it suspended the minimum rating requirement for government-backed collateral used in its liquidity offers, a concession since granted to Ireland. Greek banks could continue to tap the ECB for funds, no matter how far the country was downgraded by rating agencies (it has now reached “junk” status). For the eurozone as a whole, the bank stepped up the provision of unlimited liquidity,” writes Aktins.
The ECB attracted far more controversy when it decided to start buying eurozone government bonds.”
Indeed, some 70 billion euros of Greek bonds, according to some reports.
“By declaring it would act as a backstop in bond markets, the ECB bought the eurozone time. A year later, however, the securities markets programme has failed. The debt crisis has spread to Ireland and Portugal, both now subject to ECB-backed international bail-out plans,” writes Aktins.
The ECB knows very well they money would never be repaid by Greece and that the EU/IMF bailouts were really nothing more than a means for the government to keep on making interest payments to banks and while the size of the EU and IMF bailout interest payments would actually crush the real economy.
The way the Greek economy has collapsed and the national debt has soared was predictable. Equally predictable is the that the current plan to sell off the last of family silver in Greece now will only postpone the default of Greece and make the economic collapse even more costly.
It has emerged that the ECB liquidity made it possible for Greece to get so deeply into debt in the first place. The ECB has been giving the Greek and other banks liquidity in a “secret bailout” to the tune of 365 billion euros to finance Greece’s growing deficit, explains German economist Hans Werner Sinn.
Until mid-2007, the Target accounts were close to zero, but since then, they have grown by about 100 billion euros ($148 billion) per year.
For example, the Bundesbank’s Target claims ballooned from 5 billion euros in 2006 to 323 billion euros by March 2011. The counterpart to these claims were the PIGS’ liabilities, which had grown to about 340 billion euros by the end of last year. Interestingly, the PIGS’ cumulative current-account deficits from 2008 through 2010 were of roughly the same order of magnitude ― 365 billion euros, to be precise.
Had the ECB failed to finance these deficits, the PIGS would have had a hard time finding the money to pay for their net imports. If they succeeded at all, high interest rates would have induced them to tighten their belts, and their current-account deficits, which in the case of Greece and Portugal exceeded 10 percent of GDP, would have diminished,“ writes Sinn.http://www.koreaherald.com/opinion/Detail.jsp?newsMLId=20110506000678
As soon as Greece or Ireland or Portugal defaults, the ECB will be forced to abandon the accountant fiction that bonds and collateral on their have not fallen massively in value.
It will be forced to come clean and admit that it has put 100s of billions of bad loans on its books in violation of all the rules to protect tax payers from just this kind of scam.
Germany’s central bank, the Bundesbank, provides 27 percent of the ECB’s capital, which means that it would have to pay for more than a quarter of all losses and this could amount of 100s of billions for German tax payers alone. On top of that comes the 100s of billions of euros for the EU bailout funds.
The ECB will be not only insolvent. The ECB will also be potlicially finished along with the political and financial elite that have allowed this scam to reach such an incredible scale.
Europe’s citizens will be confronted with the stark facts that point to the reality that the ECB is a criminal enterprise, violating all the rules to suck money from taxpayers on a scale unknown in history and with the complicity of a political elite.
Luckily, awareness of the nature of the ECB scam has spread fast and prevented the ECB, EU and IMF from introducing eurobonds and also from pushing forward with a fiscal union. Awareness that the ECB is running a Ponzi scheme also makes approval from the German parliament for the new 750 billion bailout fund due to come into effect in 2013 increasingly unlikely.
The ECB and the political and financial elite clearly know they are running out of options and are doing everything to block a default by Greece, which will end the scam. The ECB is so desperate it has even threatened to cut Greek banks off from liquidty if the will cut Greek banks off from its liquidity supply, pushing Greece into financial collapse.
The threat has escalated the crisis, writes James Mackintosh in the FT.
http://www.ft.com/intl/cms/s/0/13d18874-8584-11e0-ae32-00144feabdc0.html#axzz1NMkaqvSR
There can be little doubt, though, that the ECB would come out worse from a Greek default, which is facing certain ruin anyway under the current bailout terms and has nothing left to lose.
Greece would ultimately recover from a default. The ECB would not.
What is a financial crisis will turn into a full blown political crisis as people start to ask how the ECB, could have been allowed to waive all the rules and give unlimited liquidity to the banks knowing it was up to the tax payers to stump up?
What were the regulators doing? What were the finance ministers doing while the ECB created this mountain of debt that will allow banks to suck so much from the tax payers on the grounds they have to honour a debt on paper for, for example, 1 billion euros for Guiness Emerald Jewels from County Maquire in Greece, which has fallen in value by 990 million euros? ABS securities are hardly more substantial than this.
The question would be asked: why, if the ECB can throw all the rules over board to funnel money to the banks at the tax payer’s expense, cannot it throw the rules over board to save the tax payer from expense?
Why can’t the ECB just give liquidity to banks without booking a debt as China’s central bank does, so allowing for its current boom as Hörmann explained?
A Greek default would, therefore, spell the end of the ECB, and the financial and political elite who have organised and run this blatant scam.
If the Greeks don’t default, it is my personal wish, as an Irish citizen and holder of an Irish passport, that Ireland pulls the rug from underneath the ECB Ponzi scheme and defaults – and soon.
Of course, it means marginalising Enda Kenny, a man, who, it seems, did not even dare ask President Barack Obama about the penal IMF/EU loan on his recent trip to visit, and who is also supporting financial Gauleiter Christine Lagarde as the new IMF chief.
But the voters put in Kenny to deal with the banks not grovel to them. He cannot just be allowed to hog a seat and block meaningful action by the rest of the political parties.
If Ireland manages to bring down the ECB financial looting machine, it will be a great historical feat and also a great honour for the country, comparable with single handedly defeating the Nazi war machine during the second world war.
Ireland should default on its EU and IMF loan as soon as possible and start printing its own money to give it space to sets about the task of putting the banks into a managed insolvency.
Ireland will not only save its own citizens, but all the citizens of Europe from the imperial ambitions of the ECB. Indeed, the ECB’s address in Frankfurt is even the Kaiserstrasse – Kaiser as in Kaiser Wilhelm Hohenzollern.
But the honour of collapsing the imperial financial machinery of conquest can now go to Greece, Ireland and Portugal. Every “victim” now in the belly of beast also has the power to bring the beast down, a fact that is clearly giving ECB bankers severe anxiety."